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Fidelity Fund Certificate validity

18 April 2019

Tria Real Estate (Pty) Ltd v Labuschagne and Another (5583/2018) [2018] ZAFSHC 198 (6 December 2018)

Validity of Fidelity Fund Certificates when an estate agency converts from a Close Corporation to a Company and the consequences thereof in a dispute between the agency and an ex-employee over the validity of a restraint of trade agreement.

Per Mathebula, J:

There are two (2) fundamental flaws that render the agreement between the parties to be invalid therefore unenforceable. Firstly, the applicant is cited as Tria Real Estate (Pty) Ltd trading as Pam Golding Bloemfontein. This means that it is a company with limited liability registered in accordance with the Laws of the Republic. It is a legal entity that can sue and be sued in its own right. In short, it has a legal personality separate from that of its directors. Its core business is that of an estate agency.

[9] The Fidelity Fund Certificate referred to on page 80 of the papers is issued to Tria Real Estate CC. A close corporation is also an entity with separate identity to that of its members. It has its own legal personality and can sue and be sued in its own name. Strictly speaking it is a different entity to a company cited as the applicant in this matter.

[10] These two (2) entities cannot be the same and be equated as such. They are separate entities. In this matter the close corporation was converted into a company in December 2013. This means that the close corporation ceased to exist as far back as December 2013. So, the Fidelity Fund Certificate was issued to a non-existing entity. The submission that the new Companies Act did not envisage a shutdown of the operations of an entity during conversion does not hold water at all. I was not referred to any authority to support that proposition. There is no plausible explanation as to why five (5) years later after the conversion of the close corporation to a company, the certificate is still issued in the name of a non-existing entity. The assurance (if any) by the officials of the Estate Agency Affairs Board that there is nothing wrong in such conduct despite a glaring transgression of the law is unacceptable.

[11] I come to this conclusion because Section 29B of the Companies Act 61 of 1973 provides that:-

“When a company is converted into a close corporation in terms of the Close Corporation Act, 1984, the Registrar shall, simultaneously with the registration of the founding statement of the close corporation by the Registrar of Close Corporations in terms of the said Act, cancel the registration of the memorandum and articles of association of the company concerned.”

This will likewise apply when the conversion is from a close corporation to a company. A new entity is formed and the previous one simply ceases to exist.

[12] The second issue concerns the regulation of the property industry and the requirements to practice the profession. The regulator of all estate agents is the Estate Agents Affairs Board. In terms of Section 26 of the Estate Agency Board Act 112 of 1976 any person is prohibited from performing any act as an estate agent unless a valid Fidelity Fund Certificate has been issued to him or her. In the event that such a person is a company, each and every (my emphasis) director of that company must also possess a valid Fidelity Fund Certificate. The same applies to the close corporation that each and every member must possess one. This also extends to every person employed by such an entity as an estate agent. It is not enough that the application is being processed or some other hiccup is in the process of being solved. The provisions are clear and peremptory.

[13] These requirements were emphasised and the courts concluded that it is the transgression of the law not to adhere to section 26. The issuing of Fidelity Fund Certificates to Estate Agents is to ensure that the public is not hard done by unscrupulous elements within the property industry. It is a controlling measure to minimise or eliminate the risk that the unsuspecting public may be exposed to. In short, it is a licence to practice without which you cannot practice.

[14] The contention that the certificate issued to a close corporation should be deemed to have been issued to a company because it is the “same” entity has no merit. As stated earlier I have not been referred to any legal authority and despite diligent search I could not find any to sustain this argument. In this matter the applicant was not in possession of a valid Fidelity Fund Certificate and therefore not in compliance with the governing Act. This means that the applicant could not act as an Estate Agent. This failure to comply as stated above renders the agreement entered between the parties null and void thus unenforceable.

Full judgment

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